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November 14, 2022 Practice Points

Movie Theater Chain Breaks Trend, Wins COVID Force Majeure Case

Georgia Court of Appeals absolves Regal Cinemas for not paying base rent.

By David J. Marmins and Jordyn L. Simon

After an onslaught of cases holding that the COVID-19 pandemic does not absolve retail tenants from paying rent pursuant to lease force majeure clauses, the Georgia Court of Appeals broke the mold with its decision in Hamilton Mill Theater Development, LLC v. Regal Cinemas, Inc., — S.E.2d —, 2022 WL 3697602 (Ga. Ct. App. Aug. 26, 2022). Regal Cinemas, Inc. won summary judgment at the trial court on Hamilton Mill Theater Development, LLC’s claims for underpayment of rent before and during the COVID-19 pandemic. Hamilton Mill appealed, and the Court of Appeals affirmed the trial court’s order.

Lease Required “First Run” Movies

The 2007 lease between Hamilton Mill and Regal provides that “[s]ubject to the provisions of this Lease, the Demised Premises shall only be used for the for the following (‘Permitted Use’): the conduct of a fourteen screen motion picture theatre for the presentation of first run motion pictures and providing a first class family operation (but not for operation of a ‘dollar’ or discount theatre) . . . .” (Emphasis added.) In exchange, Regal agreed to pay Hamilton Mill rent equivalent to 15 percent of Regal’s gross box office receipts and concession receipts on a monthly basis. After the expiration of the tenth full lease year of continuous operation of the “Demised Premises for the Permitted Use,” the lease provides that Regal may elect to “go dark” or change the permitted use “by giving Hamilton Mill written notice of Regal’s election [(“Election to Go Dark”)].” Upon Regal’s election, the percentage rent structure under the lease converts to fixed monthly rental payments at a rate comparable to first-class retail space of comparable size within a ten-mile radius of the premises (fixed base rent). The lease also includes a force majeure provision, which states, in relevant part, that the “inability to obtain labor or materials or reasonable substitutes therefore . . . . shall be a ‘Force Majeure' event and shall be excused and not be a breach under this Lease by the party in question.”

COVID Halts Movie Releases

As with other movie theaters across the nation, government orders forced Regal to cease operations in March 2020 to weather the initial wave of COVID-19. In May 2020, Georgia’s governor lifted the state’s stay-at-home orders, but Regal could not reopen for the permitted use because studios were not releasing first-run films. Regal’s inability to operate directly impacted its obligation to pay rent. As a result, Hamilton Mill sent Regal a notice of default for, among other things, failing to resume operations for the permitted use and stated that such failure is an election to “go dark,” thereby entitling Hamilton Mill to fixed base rent. Despite Hamilton Mill’s notice, Regal continued paying percentage rent totaling only approximately $400 per month.

Court Sides with Regal

Hamilton Mill commenced an action against Regal to recover Fixed Base Rent, and later amended its complaint to include a claim for pre-pandemic percentage rent on gross receipts from concession sales. Hamilton Mill moved for partial summary judgment on its Fixed Base Rent claim and Regal cross-moved for summary judgment on all of Hamilton Mill’s claims. The trial court granted Regal’s motion, and Hamilton Mill appealed. On appeal, Hamilton Mill argued that Regal’s failure to continuously operate in the Premises was a material breach of the lease triggering fixed base rent. Applying the clear and unambiguous language of the lease, the court disagreed.

“The lease between the parties required Regal to continuously operate the theatre for the Permitted Use of being a ‘fourteen (14) screen motion picture theatre for the presentation of first run motion pictures and providing a first class family operation (but not for operation of a ‘dollar’ or ‘discount’ theatre)[.]’ The parties agree that ‘first run’ and ‘first class’ are terms of art in the movie industry which mean that the theatre must show newly-released blockbuster movies that are generally not available elsewhere and to do so at the beginning of the movie’s release.” It is indisputable that Regal could not meet its obligation to continuously show first run movies when no first run films were being released.

The court agreed with Regal’s argument that its inability to operate was not an election to go dark. The ability to go dark is conditioned upon Regal providing Hamilton Mill written notice of its election, which Regal never did. Without such notice, Hamilton Mill cannot unilaterally impose fixed base rent on Regal. Instead, Regal argued it went dark because there were no first run movies to show at its theater. The court agreed, holding “[Regal’s] failure to show first run movies was the result of the force majeure clause excusing [Regal] of its obligation to continuously operate its theatre for first run movies, not the result of its (non-existent) written election to ‘go dark.’”

As a separate issue, Hamilton Mill claimed that Regal underpaid percentage rent on pre-pandemic concession sales by excluding payments received pursuant to a marketing agreement with its beverage supplier. Again, applying the clear and unambiguous language of the lease, the court held that payments received from a marketing agreement granting Regal’s supplier to be the exclusive supplier of beverages in all Regal’s theatres nationwide are not gross receipts from the sale of candy, popcorn, soft drinks, confections, or merchandise sold at the premises.

Contract Language Was Key to Theater’s Victory

The Court’s holding in Regal Cinemas is an overall win for movie theaters emerging from the COVID-19 pandemic and is distinguishable from earlier cases like In re Cinemex USA Real Est. Holdings, Inc., 627 B.R. 693 (Bankr. S.D. Fla. 2021). In In re Cinemex, the United States Bankruptcy Court for the Southern District of Florida rejected a movie theater tenant’s argument that the purpose of its lease was frustrated by the COVID-10 pandemic and stay-at-home orders which, inter alia, caused film production to cease. See In re Cinemex USA Real Est. Holdings, Inc., 627 B.R. 693, 696 (Bankr. S.D. Fla. 2021). Distinct from Regal Cinemas, however, the lease in Cinemex did not require the movie theater tenant to show first run films. Thus, the tenant was precluded from arguing that the purpose of its lease was frustrated by an event of force majeure. These cases reflect that the continued application of force majeure clauses to movie theaters (and any other business emerging from the COVID-19 pandemic) will be a case-specific exercise.

David J. Marmins is a partner and Jordyn L. Simon is an associate with Arnall Golden Gregory LLP in Atlanta, Georgia.

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